How To Pay Contractors Internationally: Best Strategies for 2025

International business is often fraught with legal and financial challenges. It could become more complex when working with overseas contractors. 

The varying tax regulations, currency exchange rates, and cultural differences often complicate international contractor payments. 

But here’s a good thing: Modern solutions like Skuad’s Agent of Record (AOR) can help you maintain a smooth and compliant contractor payroll system. 

This guide will explore the key considerations, strategies, and tools on how to pay contractors effectively, minimizing risks, and maximizing efficiency.

Independent Contractor vs. Employee

You can classify workers between contractors and employees based on legal and tax implications for operational compliance:

Why an Agent of Record (AOR) is the Best Solution

AOR stands for Agent of Record. It is a legal entity that acts as a local representative for foreign businesses, primarily for cross-border contractor management and compliance to avoid employee misclassification.

AOR can significantly benefit you if you lack the resources to manage contractor payroll or desire to invest in a local presence.

Benefits of using an AOR

1. Improves your ability to hire and manage contractors from various countries.
2. Wondering how to pay a foreign contractor? An AOR can simplify international contractor payments by establishing local bank accounts. It makes it easier to pay foreign contractors in the local currency.
3. It is an effective contractor management software for local tax compliance and regulatory adherence. 
4. Additionally, AOR is good at risk mitigation associated with operating in a foreign market.
5. AOR is a cost-effective solution, as it offers shared expertise gained from working with multiple clients, compared to setting up a local subsidiary.

Skuad AOR - for contractor management

Skuad offers a specialized AOR platform to streamline your contractor management. 

You can automate administrative tasks while ensuring compliance and maintaining positive relationships with your overseas contractors.

Skuad AOR's services, which include contractor onboarding, payment processing in 100+ currencies, benefits administration, compliance management, and time tracking, can benefit you.

Comparison with other methods

Here is a quick comparison of AOR with other common methods of international contractor payments or freelance payment solutions:

Among various know-how on how to pay international contractors, AOR is an effective choice. 

It is the best way to pay independent contractors in complex regulatory environments.

Step-by-Step Guide: How to Pay International Contractors

Here is a comprehensive step-by-step guide on how to pay contractor workers, from classification to choosing the payment method and handling taxes:

Step 1: Classification

Employee misclassification has significant legal and financial consequences. You can avoid these risks by accurately classifying workers based on factors including:

Step 2: Setting payment terms

• You can consider industry standards, experience, and economic conditions to decide fair market rates.
• You may determine withholding taxes and ensure contractor's awareness of their tax obligations.
• You must formalize the agreement with a written contract outlining payment terms, such as net terms, milestone payments, retention, and other details.

Step 3: Choosing the right payment method

Your choice of freelance payment solutions can impact costs, speed, and security. Here's a comparison of common options:

Step 4: Handling taxes and compliance

Here’s a quick summary of how to pay someone as a 1099 tax status (as applicable in the United States) and compliance requirements :

Step 5: Using technology for payments

• Technology has simplified contractor payroll to a greater extent. 
• An AOR integrated with global payment gateways can handle the invoicing and disbursement of your contractors’ earnings. 
• From assessing invoices to calculating earnings and processing payments, AOR is an efficient freelance payment solution.

Common Mistakes to Avoid When Paying International Contractors

You will risk paying back taxes and face other legal and financial consequences if you don’t follow the correct know-how to pay contractors:

• More often than not, you may classify workers as independent contractors instead of employees wrongly.
• Local labor, tax, and immigration laws are complex and dynamic. Without expert help, it may be difficult to stay updated. 
• You may not factor in exchange rate fluctuations when budgeting your contract employees.
• Additionally, you may find it challenging to address misunderstandings and communication gaps due to cultural differences.

Advanced Strategies for Efficient Contractor Payments

Beyond the fundamental strategies, you can optimize your international contractor payments through the following techniques: 

• Utilize automated clearing house (ACH) transfers or international freelance payment solutions like Wise, PayPal, Payoneer, etc. However, an AOR will help you track, process, and calculate contractor activities in addition to disburse timely payments in local currency. 
• Moreover, utilizing multiple payment methods will offer contractors a choice of payment methods to accommodate their preferences.
• You can offer incentives for long-term partnerships, such as preferential rates or extended payment terms.

Conclusion

We discussed how AOR handles complex local regulations, manages HR functions, payroll, and benefits, and offers flexible and scalable solutions to hire international contractors.

You can expand into new markets without a physical presence and mitigate risks associated with contractor management with AOR. 

To learn more about how an AOR can benefit your business, book a demo with Skuad. 

Our experts can provide tailored guidance and answer any questions you may have on how to pay your contractor. 

FAQs

1) How do you usually pay a contractor?

The most common way to pay a contractor is through direct bank transfers or international payment systems like Wise, PayPal, Payoneer, etc. Moreover, companies are shifting to AOR solution providers like Skuad for advanced contractor management. 

2) Should contractors be paid upfront?

How you pay contractors is a mutual preference. There is no statutory backing in most jurisdictions. You can pay your contractors upfront or divide the project scope into various milestones for payment purposes. 

3) What is the most secure way to pay contractors?

The most secure way to pay contractors depends on the size of the payment and their location. Traditionally, online modes of payment through direct bank transfers are preferred, but they don't involve contractor management. In the current scenario, AOR, like Skuad, is emerging as the most secure way to pay contractors as it involves tracking contractor work activities, invoices, and scheduling disbursements in 100+ currencies.

4) How do I structure a contractor payment?

You can structure a contractor payment based on frequency and timing, such as paying 15 days after the invoice, paying 30 days after the invoice, or making milestone-based payments. You must also factor in currency fluctuations while structuring your contractor payments. 

5) How do I pay a contractor from another country?

Online modes of payment, like payment wallets, are the best way to pay a contractor from another country. If you work with multiple contractors simultaneously, you can choose AOR services like Skuad. 

6) Which platform is best to pay international contractors?

Some popular platforms for international contractor payments include PayPal, Wise, or Payoneer. These platforms offer currency exchange, global reach, and secure payment processing. Moreover, using AOR like Skuad, you can track contractor activities and invoices and schedule disbursements in 100+ currencies.

7) Do you need a W9 for international contractors?

Yes, you must request that your US resident contractors provide you with a W-9 form. You can use the form to identify the contractor's taxpayer identification number (TIN) and report income on Form 1099-NEC. Further, US employers must seek a W-8BEN form from contractors who are non-US residents.